When Should You Update Your Beneficiaries? A Guide to Beneficiary Designations.
Beneficiary designations are easy to set up and just as easy to forget about.
You may have named beneficiaries when you first opened a retirement account, enrolled in an employer-sponsored plan, purchased life insurance, or established another financial account years ago. Since then, your family, relationships, and financial situation may have changed significantly.
That makes reviewing your beneficiaries an important part of ongoing financial planning.
Here’s what to know about beneficiary designations, when you should review them, and which accounts deserve a closer look.
What is a beneficiary designation?
A beneficiary is a person or entity you name to receive an asset after your death.
Beneficiary designations are commonly used for accounts and policies such as:
401(k)s and other employer-sponsored retirement plans
Traditional and Roth IRAs
Life insurance policies
Annuities
Health savings accounts
Certain brokerage accounts registered as transfer on death, or TOD
Other financial accounts that allow a beneficiary or transfer-on-death designation
Depending on the account, you may be able to name one beneficiary or several and specify what percentage each person should receive.
You may also be asked to name both primary beneficiaries and contingent beneficiaries.
Primary vs. contingent beneficiaries
Your primary beneficiary is generally the first person or entity entitled to receive the asset after your death.
A contingent beneficiary serves as a backup if a primary beneficiary cannot or does not receive the asset. For example, a contingent beneficiary may become relevant if your primary beneficiary dies before you.
Naming contingent beneficiaries can provide another layer of direction for how you want your assets distributed.
Why are beneficiary designations so important?
For many financial assets, the beneficiary designation associated with the account plays a significant role in determining who receives the money after the owner's death.
Retirement accounts such as 401(k)s and IRAs and insurance policies generally pass according to their beneficiary designations. FINRA also advises investors that beneficiary designations typically take precedence over instructions contained in a will.
That means an estate plan can be thoughtfully prepared while an old beneficiary form still creates an unintended result.
Consider someone who named a parent or former partner as the beneficiary of an account many years ago. They later marry, have children, and update their will, but never revisit the beneficiary designation on the account.
Depending on the account and applicable law, the old designation could still matter.
Regular beneficiary reviews help identify those inconsistencies while you still have the opportunity to address them.
When should you update your beneficiaries?
There is no single life event that triggers a beneficiary review for everyone. In general, it makes sense to review your beneficiary information following any major change in your family, relationships, estate plan, or financial life.
Some of the most common reasons include:
Marriage
Getting married is an important time to review the beneficiaries across your financial accounts.
You may want to add your spouse to certain accounts, reconsider how assets would be divided among other family members, or coordinate your beneficiary choices with a new estate plan.
Employer-sponsored retirement plans can also have special rules for married participants. The IRS notes that many plans require a spouse's written consent before another beneficiary can be selected.
Because rules differ by account and plan type, review each account individually rather than assuming that one change will update everything.
Divorce
Beneficiary designations deserve immediate attention during and after a divorce.
Do not assume that a divorce automatically removes a former spouse from every account.
Employer retirement plans can be particularly complex. A Qualified Domestic Relations Order, or QDRO, may give a former spouse rights to some retirement benefits, and changing a beneficiary designation does not override those rights. The IRS recommends contacting the retirement plan administrator after a divorce to review and, when appropriate, update beneficiary information.
Divorce is also a good time to review your broader financial and estate plan, including insurance policies and individually owned retirement accounts.
The birth or adoption of a child
Welcoming a child often changes how families think about their estate and financial plans.
You may want to add children as beneficiaries or contingent beneficiaries, reconsider percentages among existing beneficiaries, or create a plan for how inherited assets would be managed if your children are still minors.
The IRS specifically recommends reviewing retirement-plan beneficiaries after having or adopting children.
Naming a minor child directly can create additional estate-planning considerations, so this may also be an appropriate time to coordinate with an attorney regarding trusts, guardianship, and how assets should ultimately be managed.
The death of a beneficiary
If someone currently listed as a beneficiary dies, review the account even if you have a contingent beneficiary already listed.
You may need to name a new primary beneficiary, change contingent beneficiaries, or reconsider how percentages should be allocated among the remaining people you have named.
The IRS similarly recommends that retirement-plan participants review their beneficiary elections following the death of a spouse.
A change in a family or personal relationship
Not every important relationship change involves a marriage or divorce.
Over time, your relationship with a sibling, parent, child, friend, partner, charity, or other beneficiary may change. Your financial plan should continue to reflect your current intentions.
If you would no longer make the same beneficiary choice today that you made when the account was opened, it is probably time to review it.
A significant change in your financial situation
A beneficiary designation that made sense when an account held $10,000 may deserve another look after decades of saving and investing.
As your wealth grows, the relative value of individual accounts can change dramatically.
A significant increase in your assets is a good reason to revisit how your beneficiary designations fit within your overall estate plan.
Changes to your estate plan
If you update your will or trust, review your beneficiary-designated accounts at the same time.
Your attorney, financial advisor, and tax professional can help you evaluate whether the different pieces of your plan work together as intended.
This coordination matters because changing your will does not necessarily change the beneficiaries already listed on retirement accounts, insurance policies, and other beneficiary-designated assets.
How often should you review your beneficiaries?
Even if you haven't experienced a major life event, reviewing beneficiary designations periodically is a useful financial-planning habit.
An annual review is a simple rule of thumb.
You may choose to make beneficiary reviews part of your annual financial planning meeting, year-end planning checklist, or another recurring financial checkup.
You do not necessarily need to change anything each year. The goal is simply to verify that the information on file still matches your wishes.
Your review should answer a few basic questions:
Do I have a beneficiary listed?
Is the beneficiary still the person or entity I want to receive this asset?
Are my primary beneficiaries correct?
Have I named contingent beneficiaries?
Are the percentages allocated the way I intend?
Have there been any births, deaths, marriages, divorces, or relationship changes?
Does this designation align with my current estate plan?
Have I opened or rolled over any accounts since my last review?
What happens if you don't name a beneficiary?
What happens when an account has no valid beneficiary depends on the type of account and the terms of the plan or financial institution.
The account's governing documents may determine who receives the assets. In some circumstances, assets may become payable to an estate, which can affect how and when the money is ultimately distributed.
Retirement accounts can add another layer of complexity because the identity of the beneficiary can affect the rules governing inherited-account distributions. The IRS applies different rules depending on factors such as whether the beneficiary is a spouse, another individual, or an entity.
Rather than relying on an account's default provisions, making an intentional beneficiary election can provide greater clarity.
Does a beneficiary designation override a will?
In many cases, yes.
Assets with valid beneficiary designations generally transfer according to those designations rather than instructions in a will. FINRA specifically notes that retirement accounts and insurance policies pass directly to named beneficiaries and that beneficiary designations typically override instructions in a will.
Certain brokerage accounts can work similarly when they have a transfer-on-death registration. The SEC explains that TOD registration allows securities to transfer directly to the designated person or entity upon the owner's death without going through probate for those assets.
This is one reason beneficiary reviews should be part of estate planning rather than handled as a separate administrative task.
How do you update a beneficiary?
The process is usually straightforward, although it varies by institution.
Typically, you will need to:
Identify the accounts or policies that allow beneficiary designations.
Review the beneficiaries currently listed.
Request or access the appropriate beneficiary-change form.
Provide the requested information for your new beneficiaries.
Specify primary and contingent beneficiaries and allocation percentages as applicable.
Complete any required signatures or spousal consent.
Submit the change and confirm that it was processed.
Keep documentation of the updated designation with your financial records.
For an employer-sponsored retirement plan, the IRS recommends contacting the employer or plan administrator and following the plan's beneficiary-change procedures.
For IRAs, insurance policies, annuities, and brokerage accounts, contact the financial institution or insurance company holding the account.
A small task that can have a significant impact
Beneficiary designations may only occupy a few lines on an account form, but they can play an important role in carrying out your financial and estate-planning wishes.
A few minutes spent reviewing them today can identify outdated information before it becomes a problem for the people you care about.
Consider adding a beneficiary review to your annual financial checklist and revisiting your designations anytime you experience a major life event.
If you have questions about beneficiary designations, the Aurora team is here to help.